FTSE 250 shares appeal to a specific type of investor.

The FTSE 100 offers small capital gains but significant defensive qualities and reliable dividend pay-outs. FTSE AIM stocks offer the chance of exceptional capital gains but come with correspondingly high risks.

This has played out exactly as one would expect in 2022: the FTSE 100 is down 2% year-to-date, and while some FTSE AIM companies have seen exceptional growth, the index as a whole is down 32% over the year.

The FTSE 250 is a hybrid of sorts, covering a broad swathe of companies including several that swing between the indices with each FTSE Russell quarterly review, at both ends of the value scale.

2023 could represent an exceptional chance to buy shares in some downtrodden, undervalued FTSE 250 shares that have been beaten down by the wider recessionary environment rather than their own failings.

FTSE 250: political and economic environment

Of course, the UK’s corporate environment is becoming less friendly than in previous years — and it’s not hard to see why. The UK will experience zero growth in 2023 according to the OECD, with Bank of England Governor Andrew Bailey expecting a two-year long recession. Inflation is at 10.7%, energy bills are increasing in April, and the base interest rate is at 3.5% and rising.

Factor in the legacy economic effects of the pandemic, the ongoing Ukraine War, and China’s interminable lockdowns, and many of the best FTSE 250 stocks may find 2023 tough going. That’s before considering increases to corporation, capital gains, and dividend taxes that could already be acting as a deterrent on investment, in addition to fiscal drag on incomes that is likely to see spending fall fast through next year.

There’s also the spectre of industrial action hanging over the UK. ONS figures show that 417,000 days of work were lost in October, the most since November 2011. And these numbers only seem set to rise. Employers and the government fear both committing to higher pay demands through the recession as well as the inflation-wage spiral.

Meanwhile employees argue that many UK corporations saw record profits in 2021, with PwC research showing that CEO pay of FTSE 100 executives rose by 23% in 2022 to a record £3.9 million. The first ever NHS nurse strike is now ongoing, and the BBC now even has a strikes calendar to warn the public about which services will not be running each day.

However, times of maximum fear are often those when the best long-term opportunities present themselves at excellent buy-in points.

Best FTSE 250 stocks

1. Centamin (LON: CEY)

Centamin shares fell to 74p in mid-July but have since risen by 22% year-to-date to 109p. And gold prices could reach another record high next year as the US Federal Reserve slows the pace of rate increases.

CEY’s flagship asset is the largest gold mine in Egypt, Sukari. Having taken full ownership of the mine, an independent study conducted by EnTech has found that operations at the already sizeable asset can be further expanded to 1.5 million tonnes per annum of total ore mined.

This is at the upper end of the previously indicated range and represents a huge 31% increase in ore mining rates. With a $154 million cash balance and healthy 6% dividend yield, Berenberg Bank has set a 123p target for the gold miner, representing a healthy potential upside.

2. ITV (LON: ITV)

ITV shares are down 38% year-to-date to 70p, mainly as a consequence of its streaming strategy pivot. However, while its streaming launch was marred by some digital woes, 15 million of its 23 million viewers of the England v France World Cup game were watched on new platform ITVX.

Many of these new users will note that the app is one of very few free-to-use platforms in the UK, supported only by ads. This means it’s not truly a competitor to paid-for titans like Amazon, Apple, or Netflix, but could still become a service that consumers will switch to as the cost-of-living crisis tightens.

Indeed, Kantar research shows that 1 million Brits have cancelled a streaming service this year, and many more are likely to follow in 2023. This could leave 2023 as an exceptional opportunity for ITVX to pick up cash-strapped consumers.

And financially, the company made profits of £301 million in H1, and offers a price-to-equity ratio of just 6, and a 7% dividend yield. In fact, with a market cap under £3 billion, it could become a private equity target as well.

3. Games Workshop (LON: GAW)

Games Workshop shares were worth almost 12,000p a little over a year ago as the miniature wargames company benefitted from surging interest in hobbies during the pandemic. But they crashed to 5,795p by 30 September 2022, before then recovering to 8,555p today. If nothing else, GAW demonstrates the volatility displayed by even some of the best FTSE 250 shares.

GAW has a middling financial position: the company has forecast H2 revenue of £210 million, up on H2 2021’s £191.5 million. However, increased costs mean that profits will fall from £88.2 million to circa £83 million, and it expects profitability to fall again in 2023. And with a price-to-earnings ratio of 22, the shares are not cheap by traditional metrics.

And of course, like many in the retail sector, its physical shops are likely to be hit by falling consumer spending, rising taxes, and the continual strikes. But GAW has a huge online presence and an international presence including in the US market. Arguably, some of the recession risks are already priced in.

But the current tailwind is the recently announced partnership with Amazon to develop its ‘intellectual property into film and television productions,’ with the rights to its popular Warhammer 40,000 universe the initial priority. Details are still to be decided, but it’s worth noting that Total War: Warhammer III was the most popular title on Steam early last year.

The concern with this partnership is creative control. Amazon’s interpretations of Lord of the Rinds and The Wheel of Time felt like Plato’s Cave for many franchise fans. But the influence of Henry Cavill, fresh from his exit from Netflix’s The Witcher, reportedly because of creative differences, could see the new partnership blossom in 2023.

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